British Petroleum

Literature Review

Introduction:

The literature relevant to research into the issue of corporate strategy, governance, and ethics in the global environment is diverse and deals extensively with the various models and tools for auditing an organization performance and its environment. This kind of analysis is the first stage of planning and it helps marketers to focus on key issues. SWOT, PESTLE, STEEPLE, PLC, and Porter are some of such models and tools for evaluating the performance of corporations within a global environment.

The Role of the SWOT Analysis in Evaluating the Performance of Organizations:

Starting by SWOT, Renault, V. (1993) notes that this analysis tool stands for strengths, weaknesses, opportunities, and threats. An example of the fields in which information technology can be very helpful for tactical management and strategic controlling is the SWOT analysis. The SWOT analysis is a device used to evaluate the influence of the strategic opportunities on the company and its effective use of information technology. The SWOT analysis refers to the analysis of the strengths, weaknesses, opportunities, and threats that face a given company. The strengths of the company are the areas in which it is one of the market leaders. The weaknesses are the areas of business performance in which the company does not reach high competence. The opportunities are the potential new business market that may expand the present activities of the company. Finally, the threats are the potential market losses by other competitors of the company.

PEST, PESTLE, and STEEPLE as Methods of Auditing Corporations' Performance:

Moreover, Lubatkin, M., Ndiaye, M. and Vengroff, R. (1997) state that the PEST analysis stands for the Political, Economic, Social and Technological factors that describe the framework of macro-environmental component of strategic management. Some analysts even added Legal and Environmental factors, expanding it to PESTLE. This model has recently been further extended to STEEPLE adding Ethics and Demographic factors in evaluating corporations' performance.

Evaluating a Product in the Market using PLC:

On the other hand, McNamara, C (1999) refers to the Product Life Cycle (PLC) Analysis, which pertains to the life of the product in the market. According to this model, the product life cycle consists of four stages: introduction, growth, maturity, and decline. In the introduction stage, the need for immediate profit is not a pressure. The product is promoted to create awareness. If the product has no or few competitors, a skimming price strategy is employed. Limited numbers of product are available in few channels of distribution. In the growth stage, competitors are attracted into the market with very similar offerings. Products become more profitable and companies form alliances and joint ventures take each other over. In the maturity stage, sales grow at a decreasing rate and then stabilize. Products that survive the earlier stages tend to spend longest in this phase. Price wars and intense competition occur. Promotion becomes more widespread and uses a greater variety of media. Finally, in the decline stage, there is a downturn in the market. For example more innovative products are introduced or consumer tastes have changed. In this stage, there is intense price-cutting and many more products are withdrawn from the market. Profits can be improved by reducing marketing spend and cost cutting. During the stages of product life cycle, the organization achieves the peak of profit at the growth stage. The growth stage is critical to a product's survival because competitive reactions to the product's success during this period will affect the product's life expectancy.

The Porter Model and Organizations' Management Strategies:

Finally, Porter, M.E. (1986) argues that the Porter model is one of the most effective tools in evaluating management strategies within an organization. Michael E. Porter is a professor of strategy at HarvardBusinessSchool since 1973. He is considered one of international experts on competitive strategy and international competitiveness. His ideas are now employed at all business schools worldwide (Christensen and Montgomery). He created a course for newly appointed executives of large global companies, and widely disseminates its expertise on competitive strategy and international competitiveness for business and governments worldwide (Grant). According to Porter, the development of business strategy must be based on a competitive advantage already obtained or potential, which alone can have an edge over its competitors. We can classify the competitive advantages in two main categories: cost advantage and differentiation advantage (Arvin and Barillas). A strategy should be aimed only one of two types of advantage to a market segment considered, lest they "get stuck in the middle way". For the cost advantage, it should be understood anything that allows a company to obtain costs for implementing activities of the "value chain" below those of competitors or anything that results in a value chain optimized relative to competitors on the sector or segment coveted. The strategy is therefore designed to offer much lower prices than the competition.

Michael Porter makes three main types of strategies for complementary products: Direct control of complementary products, the bundling and cross-subsidize. When direct control complementary products, the firm offer the full range of complementary products rather than leave it to others to provide them. When one realizes bundling, the firm sells only in bulk, for a total price, a group of separate but complementary products (Archibugi). When she makes a cross-subsidize, the firm sells a product on terms that deliberately pushing the sale of complementary products. The objective of competitive advantage is to formulate a theory of the firm to understand how to acquire and maintain a competitive advantage (Hambrick and Mason). It develops the concepts of generic strategies, value chain, the principle of competitive advantage, the method of choosing a competitive field within a sector and its consequences for offensive and defensive strategies (Dunning).

According to Porter, there are multiple links between technology and competitive advantage. The technology applied to processes or products is a key competitive advantage, be it a cost advantage or differentiation. Hence, one should be aware of the variables that determine the evolution of a technology sector and outline how a company should make its technology strategy. Porter concludes this argument by stating the advantages and disadvantages of the mover on a technological sector. It is important, in this regard, to explain how a firm should select its competitors and their role in respect of competitive advantage and industry structure (Arvin and Barillas). This theory shows how the choice of good competitors can be beneficial to the competitiveness of the company, how to identify them and how to influence the range of competitors they faced. Porter insists that the optimal market share of a firm that does very rarely excessive market domination.

Porter's Five Forces and Market's Sensitivity:

Porter's five forces determine the attractiveness of a market for a given corporation. It is also known as FFF (Fullerton's Five Forces). Porter referred to these forces as the microenvironment, to contrast it with the more general term microenvironment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace. Four forces -- bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -- combine with other variables to influence a fifth force, the level of competition in an industry.

Consequently, using the above-mentioned models and tools, the performance of corporations can be efficiently audited and evaluated. For the sake of this research, the case of British Petroleum (BP) will be used to examine its performance using the above tools in order to reach a conclusion about how best BP operates within its global environment.

Introduction about BP

Importance of the Topic:

In this research, British Petroleum (BP) will be studied as a case study to examine its corporate strategies, governance, and ethics within a global environment. The importance of this topic lies in the fact that it enlightens researchers about the strategies and techniques used by corporation management to face threats and deal with risks. As such, some environmental problems that faced BP will be extensively analyzed in order to evaluate the way management has dealt with such crisis. During the last decade, BP witnessed two natural disasters that required extensive efforts to be exerted by all relevant sectors of the company. In 2005, there was a massive explosion at a BP Texas refinery in Texas City. Sadly, this explosion caused the killing of 15 workers and injuring of more than 180 others, in addition to significant environment pollution. In 2010, a Deepwater Horizon oil spill occurred in the Gulf of Mexico, flowing for about three months. This oil spill caused serious damage to marine and wildlife habitats, negatively affecting the Gulf's tourism and fishing industries. Thus, both physical disasters hurt the image of BP and spoilt its role as a corporation that cares for the environment. As such, the five key groups that were directly involved in dealing with those two disasters include Chairman and the Board, CEO and Executives, Internal & External Auditors and Audit Committee, Risk Committee, and Shareholders. While Chairman, the Board, CEO, and Executives played important parts in managing those two crises in the most effective manner possible, other sectors played an effective monitoring role both before and after the two crises. For example, the audit committee for BP played the role of the agent between the board of directors of the company and the external auditors. This to ensure that there is no direct official contact between the board of directors and the external auditors. In addition, activist shareholders paid full attention to corporate practices. As for the Risk Committee in BP, its role was extensively significant in facing the two physical disasters of 2005 and 2010.

Background about BP:

With other corporations such as Exxon Mobil and Shell, British Petroleum (BP) is considered one of the world's leading international oil and gas companies. Their fields of work are numerous, as they provide their customers with "fuel for transportation, energy for heat and light, lubricants to keep engines moving, and the petrochemicals products used to make everyday items as diverse as paints, clothes and packaging" (BP Website). BP operates in over eighty countries around the globe, with more than 85,900 employees (Table One). The board of directors of BP is basically responsible for the direction and oversight of the corporations with all its sites on behalf of the shareholders. A detailed share price of BP oil products is shown in (Table Two). Accordingly, the board of directors is directly accountable to them, as owners, for all aspects of BP's business. According to the beliefs of BP's board of directors, "good governance involves the clarity of roles and responsibilities, and the proper utilisation of distinct skills and processes." Based on such principles, the company's board of directors highly focuses on activities that enable it to promote shareholders' interests, "such as the active consideration of strategy, the monitoring of executive action, and ongoing board and executive management succession" (BP Website).

Analysis of the Crisis Management in BP

The Role of the Risk Committee in BP:

While the Risk Committee in the corporation excelled in some aspects prior to the two disasters, it yet failed in other aspects during and after both disasters. Prior to the two disasters of 2005 and 2010, the Risk Committee reflected BP's sincere understanding of their role in protecting the environment. Their operations in various countries of the world showed a care about the environment, meeting their declared policies. As declared by the company's Risk Committee, BP "is committed to three simple but important goals - no accidents, no harm to people and no damage to the environment" ("BP and the Environment"). For decades, the operations and activities of BP reflected a real interest in government protection. Thus, the Risk Committee in BP takes important precautionary measures that aim at having a minimal negative impact on nature. The companies' operations in Australia give a clear example about the compatibility between their declared policies and behavior. For example, BP has introduced a new technology, called "E10 ethanol blend fuel." According to the Australian Minister for the Environment and Heritage, Senator Ian Campbell, this new technology has the potential "to deliver a reduction in greenhouse gas emissions of between two and five per cent, when compared with neat petrol" (Campbell). This care of the Risk Committee in BP about the environment has resulted in positive changes that led to tangible results. The new technology introduced by BP in Australia has led to "one million tones of greenhouse gas abatement" (Campbell). According to Senator the Hon. Ian Campbell, "one million tones of greenhouse gas emission reductions is a significant and important milestone for BP" (Campbell). Accordingly, there are many examples which show that BP's Risk Committee's activities meet their real concerns and interest about nature. In that sense, it cannot be claimed that BP's efforts to protect the government is a market ploy. Rather, their operations reflect an interest about environmental protection.

Evaluation of BP's Risk Committee:

Despite its wide efforts to introduce itself as a company that cares about the environment, BP's Risk Committee has adopted ineffective strategies for environment protection during and after both physical disasters. In her article entitled "The Age of Corporate Environmentalism," Mangu-Ward claims that BP tries to "save the planet through expensive public relations alone." She argues that BP's Risk Committee aims only at meeting the world standards of environment protection, while it can actually do more. In many instances, BP's Risk Committee does not take adequate measures to prevent environment pollution. For example, there was a huge crude oil spill on Alaska's North Slope that was discovered last month by the Pipeline and Hazardous Materials Safety Administration in Alaska. As a result the Administration issued a corrective order, pointing out to the "ineffectiveness of the leak detection system to identify the leak" (Associated Press). So, BP's Risk Committee does not adopt an effective policy for government protection despite their strong promises to be as careful as possible to minimize environment pollution. Here, one can realize that BP's Risk Committee efforts in that concern are just a means to win the sympathy of stakeholders and improve its image in front of the public. For example, BP's declared support for the Kyoto Protocols does not reflect the corporation's belief in the importance of saving our planet from the negative effects of greenhouse gases and carbon dioxides. Rather, this support can be considered as a marketing ploy to win the competition with other oil giants.

Discussion and Analysis of the Performance of BP in the Field of Environment Protection

BP's public relations activities have succeeded in presenting the company as an institution that has a sincere understanding of their mission in environment protection. Although the oil leaking in the Gulf of Mexico was criticized by many American and non-American officials and analysts, yet the company soon designed a huge public campaign in all media tools to reform the image of the company. As recurrently reiterated by BP managers, the corporation "is committed to three simple but important goals - no accidents, no harm to people and no damage to the environment" ("BP and the Environment"). These recurrent messages that are sent to people and shareholders leave strong impacts on them and present the company as a strong advocate of environment protection. This is believed by many analysts, such as Katherine Mangu-Ward, which argues that BP "saves the planet through expensive public relations alone" (Mangu-Ward). As a result, it can be said that BP's public relation techniques succeed in reforming any negative image that may be developed towards BP as a result of disgraceful incidents such as the one that occurred few months ago in the Gulf of Mexico.

Therefore, it can be argued that BP achieved a high degree of success in regard to the role of its public relations campaigns to correct the image of the company after the incident of oil leaking in the Gulf of Mexico. On the contrary, Exxon Mobil failed to launch an effective public relations campaign after the incident of oil leaking in Nigeria in 1998. This failure in running a successful public relations campaign had a negative impact on the attitude of shareholders towards the company. Many of them decided to punish the company for their disinterest in protecting the environment. In this context, Jim Lobe, chief editor of Inter Press Service News, mentions that a coalition of twelve US environmental and public-interest groups "launched a national boycott of ExxonMobil for undermining efforts to combat global warming and lobbying Congress to open the Arctic National Wildlife Refuge (ANWR) to drilling." Finally, it can be said that effective public relation campaigns are extremely important in formulating the image of corporations for shareholders.

Service Quality and Shareholder Value Creation in BP

The quality of the services given by any organization is a key element for the success of the business of that organization. Any company should develop effective distribution channels in order to deliver the service to its customers adequately. There is no doubt that distribution channels are the most important step in internal and external trade. Actually, products or services cannot get to the public without adequate distribution channels to get through. This is what makes many experts believe that it is not the product, but getting the product to reach their customers proved to be the most critical success factor in the commercial process. However, sometimes government interferes by imposing legal restrictions, which pose numerous hurdles. Also, regional disparity creates varied demand and requires a multiple of distribution strategies, which complicates organizations' distribution arrangements.

In regard to BP, there are many factors that lead to the high expectations of its consumer towards the company as a supplier. The first of these pressures are the market pressures, which force effective decision-making. Besides, the second factor is the more intense competition among all kinds of business firms for the business of fewer producers, which feeds expectations over time. On the other hand, the second restriction on distribution channels, which causes pressure on traditional distribution channels, is new technology that expands the capabilities and the efficiencies of distribution systems. To be specific, it is important to state that there are three areas of technology that are particularly important for the effectiveness of distribution channels; namely, logistics management technology including global positioning systems and bar-coding; communications technology including the Internet, Intranets, bandwidth expansion, and e-commerce; and information systems technology such as SAP, Oracle, or Aribia.com. This new technology is profoundly impacting distribution efficiency.

The above discussion shows clearly that distribution channels are significant parts in the trading and marketing processes for BP. So, analytical studies of the factors that affect the effectiveness of such distribution channels either positively or negatively are so important. In this context, studies show that there are four main factors that influence distribution channels. These factors are: the market environment, the socio-cultural environment, the technological development, the economic conditions, and the political and legal factors. In conclusion, there is no doubt that improving the condition and effectiveness of distribution channels are vital for the success of the introduction of any product or service to the market.

Conclusion and Recommendations for BP

In order for BP to win the harsh competition in the global world market, it has to implement effective strategic management techniques, especially in the area of risk management. Actually, the implementation of risk management within any organization, whether private or public, follows a standard procedure. It consists essentially of four steps, including identification, assessment, solution and control (Sandbulte). Thus, risk identification is the establishment of an exhaustive and detailed procedure for the sake of avoiding certain threats (Hadden). This is done from the bottom up by the administrative units. The distribution of risk categories depends on the cause of risk. The financial consequences, extent of potential damage, and the degree of probability of occurrence of each risk taken into account are evaluated. The non-financial consequences, insofar as they are of importance, are another criterion for evaluation (Ruin).

The main risks for a unit is exposed are the risks that the financial consequences are potentially costly or that the degree of probability of occurrence is above average (McNamara). The main risks are the subject of special attention by the appropriate decision makers. The definition and implementation of appropriate measures can limit the extent of damage or the degree of likelihood of the risk. In this regard, action plans are developed for individual risks or risk groups (Sandbulte).

To manage risks and threats, BP should manipulate certain centralized computing solutions, in order to implement the process of risk management and support units. The risks are then evaluated based on their financial consequences and probability of their occurrence, then ranked in order of priority. The third stage of risk management is based on assessment of the latter. The action plans constitute the main element of control of risk (Hadden). This step includes the implementation, and the process ends with control of risk management. It covers monitoring and steering risk management. The process is continuous; control risk management is followed by the identification of new risks (Ruin).

As for the strategies of risk management, one can refer to the Modern Portfolio Theory. It is an overall investment strategy that seeks to construct an optimal portfolio by considering the relationship between risk and return, especially as measured by alpha, beta, and R-squared. This theory recommends that the risk of a particular stock should not be looked at on a standalone basis, but rather in relation to how that particular stock's price varies in relation to the variation in price of the market portfolio. The theory goes on to state that given an investor's preferred level of risk, a particular portfolio can be constructed that maximizes expected return for that level of risk.